Automobile financing: How to avoid the potholes
Sooner or later most kids will get tired of driving the family car (you hope). For my family, it was within a week of my eldest getting his license.
No matter when your teen driver (or you as a parent) decides the time has come to have his/her own wheels, you are going want to do all you can to protect him/her both physically and financially.
The last thing that I am going to claim to be is an expert in auto mechanics. But as a consumer, a financial professional and a parent, I have learned a few lessons about auto economics – and how to avoid the potholes of car costs.
There are five ways that cars cost you money: purchasing, financing, registering, insuring and maintaining the car. Chances are youre going to be paying for the privilege of motoring in a number of different ways, but a little research and common sense can keep the brakes on the expense.
Buying with the head not the heart. When planning what to buy, research and patience will pay big dividends for the young auto buyer. The choices are plentiful and confusing: new vs. used, SUV vs. sedan, sporty vs. economical, cool vs. practical.
The good news is there are thousands of places to get information about different vehicles, be it via consumer services, automotive publications, enthusiast websites or government safety reports. While it seems overwhelming at first, the weight of the information will ultimately reveal if a car has a solid or shabby reputation.
Equally important is the decision of whom to buy from. Research is a little more difficult to come by regarding people and companies that sell cars. It will be somewhat easier to get opinions on large high volume dealers than smaller used car dealers. Private party sellers are almost completely unknown commodities.
Young auto buyers should arm themselves with as much information as they can gather regarding the going rate for the car, and then they should be sure to comparison shop. (In the situation with my own son, we were lucky: a friend spotted a terrific deal at a small independent shop an hour from our home).
If the dream car is used, aka pre-owned in the parlance of the business, then a Pre Purchase Inspection (PPI) by a trusted mechanic who is not involved in the sale should be the next step. A good PPI could cost up to a couple of hundred dollars, but will save you thousands in the long run.
This step is especially important if the car is sold by a private party, being sold without a warranty by a dealer or if the seller is not located nearby. While not foolproof, it will give you some idea on whether to negotiate the price to accommodate repairs you feel are necessary.
Borrow with care. Taking a small auto loan and making timely payments is one of the best ways a young person can establish credit. Hopefully your teen has saved a bit to contribute to a substantial down payment. With that, and a willing co-signer, a young borrower should have no problem getting an auto loan at a fair interest rate. Financial institutions like credit unions make these sorts of loans every day.
However, the cost of getting the wrong loan is expensive – both in money, and aggravation. First-time car buyers should be especially careful of sub-prime sign and drive financing deals. High interest rates are often hidden in deals that tout a low monthly or even weekly payment. Often, these loans are at a high rate of interest for an extended period. Too often with these deals the car is junk before the loan is paid off.
The paying isnt just the initial purchase. Sales tax and insurance are two big bills that kids tend to overlook, but have to be dealt with before a car gets on the road in Massachusetts. Be sure to do the math and calculate the expense before that dream ride is purchased.
In Massachusetts, sales tax on a vehicle is paid at the rate of 6.25 percent on the average trade-in value. Therefore, while you might have gotten a deal on the car, you wont be getting one from the state. That is unless a member of your immediate family is providing the car, for a price or for free. These transfers are exempt from the motor vehicle sales tax.
Insurance is especially expensive for younger drivers, or what Massachusetts refers to as an inexperienced driver (anyone who has had a license for less than six years). In addition, any tickets or at-fault accidents are going to up that bill.
While there are ways to economize on insurance, its a good idea to make sure that the vehicle has the right coverage with the right company. The best approach is to consult with a local independent agent who can help you analyze your insurance needs.
Here are some questions you should be asking: should the young driver have an independent policy, which tends to be expensive, or should the car be listed on your policy as a parent as an additional vehicle? What level of coverage is appropriate? Does full coverage make sense for a $2,500 car?
Keep on rolling. We tend to forget that cars and trucks are big complicated machines; that point becomes painfully clear when they break down. Modern cars hold up for quite a while without maintenance – but boy, will you pay the price if you neglect the upkeep. Skip oil changes for too long, and youll be looking at thousands of dollars worth of engine work. Ignore the brake light, and that little squeal can convert a simple brake job into a new set of rotors, in addition to the pads, and so on.
While do-it-yourself (DIY) auto maintenance is not as easy as it used to be, there are some simple tasks like checking the oil, tire pressure and washing and waxing that anyone one can do. Taking it to the next level with tasks like changing oil, filters and rotating tires are not technically difficult, but if done improperly can be both expensive and dangerous. Often these skills are learned from a family member or neighbor who is an experienced do-it-yourselfer or automotive professional. If not, finding classes that teach the basics could be a family affair.
We have been fortunate to have a great rapport with our mechanic. He has watched our kids grow up and keeps us on the road without a worry. For all of us, the key has been to stay on top of the regular maintenance, which my kids tell me comes up surprisingly regularly.
Our children were lucky enough to get vehicles within days of getting their licenses. It was a liberating experience for them and for us, and a reinforcement of their growing into adulthood.
As parents, our role is to help them avoid missteps so that the newfound freedom they experience does not quickly turn into buyers remorse. If your young driver takes the time to be patient with each of the steps above, the reward will be many happy hours on the open road – and far fewer hours paying the bills.
Bonnie Doolin of Marlborough is the chief of consumer affairs for the Massachusetts Credit Union League, a Marlborough-based organization which represents 180 state and federally chartered credit unions in the commonwealth.
